Good morning, wonderful people. I am honored and thrilled to be here. I want to thank David Englert and everyone who has worked so hard to establish this wonderful FIRE series… And I want to thank all of you for being here. Briefly, I got my MS at the Institute of Optics quite a number of years ago. I then worked as an engineer for some time, decided I wanted to be a farmer, so went to Ag college and farmed for 7 years, was a bull semen broker, taught physics at SUNY Alfred, went to White Sands Missile range and built high energy lasers, then went to law school and have been practicing patent law for 17 years. Life continues to be an adventure; about 3 years ago I was fortunate to get involved with a brand new group of investors who called themselves the Seed Capital Fund. Today, our $1.5M fund is invested in about 7 start-ups---and I continue to learn something new every day. Please let me share some of it with you. Today I first want to talk about the challenges and opportunities facing university tech-transfer offices, and then, about the general state of early stage funding in NYS. I’d better get started. An entrepreneur, an angel investor, and a VC walk into a bar. The entrepreneur says to the bartender, “3 beers for me and my two friends”. The bartender looks at the entrepreneur and rolls his eyes a bit. The entrepreneur turns around to his friends but they’re gone. Thanks for not laughing—b/c it’s not a joke!
Here’s a very illustrative picture the ‘Other’ Valley of Death However, we all know that the bridge from R&D to Commercialization really looks more like a rickety rope bridge from Indiana Jones on a windy day with a big bone yard below.
IF WE ARE A TECH-TRANSFER OFFICE AND WE LOOK INTO THE MIRROR, WHAT DO WE SEE? WE SEE OPPORTUNITIES & CHALLENGES
AND IF WE LOOK EVEN DEEPER, WE CAN SEE WHAT’S REALLY HAPPENING
AS RATIONAL PEOPLE, WE MAY THEN ASK, WHY BOTHER? WELL, LOOK AT THIS…
BETWEEN 2005 AND 2006, START-UP ACTIVITY QUADRUPLED AND HAS MAINTAINED THAT LEVEL
BUT, EXCEPT FOR A FEW OUTSTANDING INSTITUTIONS, THERE ARE LESS THAN 3 START-UPS PER UNIV PER YEAR
THE ACTIVITY THAT HAS OCCURRED IS PRIMARILY IN THE ENERGY AND THERAPEUTIC SECTORS
SO, LOOKING INTO THE MIRROR, IT’S TIME TO ASK OURSELVES SOME CRITICAL QUESTIONS… THE HONEST ANSWERS WILL DO A GOOD JOB OF INFORMING US WHETHER WE END UP ON THE OTHER SIDE OF THE BRIDGE OR IN THE BONEYARD BELOW
THE CHALLENGES THAT FACE TCO’S, AND THE FACTORS THAT INFLUENCE THE SUCCESFUL ANSWERS TO THE QUESTIONS ON THE PREVIOUS SLIDE CAN BROADLY BE STATED AS SHOWN.
AND, COMPOUNDING THE CHALLENGES….. +++++++++++++++++++++++++++++++++++++++++++++++++++++ OK, EVERYONE BREATHE……
HERE IS A SLIDE SHOWING THE TRADITIONAL FUNDING SEQUENCE
LOOKING AT THIS MODEL FROM A DIFFERENT VIEW, WE SEE THE NEED FOR A NEW MODEL AND WHERE THE OPPORTUNITY LIES. ++++++++++++++++++++++++++++++++++++++++++++++++++++++++++ I’D LIKE TO SHIFT GEARS A BIT, NOW (NEXT SLIDE)….
TAKE A LOOK AT SOME INTERESTING…AND DISTURBING STATISTICS ABOUT WHAT’S GOING ON, FUNDING-WISE, IN OUR OWN BACK YARD. … FIRST, I WANT TO PARTICULARLY THANK JUDY ALBERS OF EXCELL PARTNERS HERE IN ROCHESTER FOR DOING A TERRIFIC JOB OF PUTTING TOGETHER THE FOLLOWING INFORMATION AND ALLOWING ME TO USE SOME OF WHAT SHE ASSEMBLED FOR THIS TALK
THIS GRAPH SHOWS NATIONAL TRENDS FOR VC INVESTMENTS OVER THE PAST 10 YEARS 2008 WAS AT ABOUT $30B, SIMILAR TO ’07, BUT THINGS HAVE DECLINED A LITTLE IN ’09 AND MANY BELIEVE THAT THEY ARE EXPECTED TO CONTINUE THAT WAY FOR A WHILE
OF THE $30B INVESTED, WHERE IS ALL OF THE MONEY GOING? CALIF BOSTON AREA … .POOR NYS…
THIS TABLE SHOWS THAT NYS INVESTED MORE CAPITAL THAN IT RECEIVED, TOTALING ALMOST $3B
SADLY, OF THAT $3B, ONLY $250M OR 9% STAYED IN NYS THAT’S ALARMING IF YOU ASK ME
HERE’S WHERE THE REST OF THE $$ WENT. WHAT’S WRONG WITH NY?
THIS SLIDE SHOWS THE SPLIT BETWEEN DOWN-STATE AND UP-STATE … BUT (NEXT SLIDE) R&D SPENDING BETWEEN UP-STATE AND DOWN-STATE WAS ALMOST 50/50 WHERE’S THE DISCONNECT???
COMPOUNDING THE PROBLEM……. START-UP AND EARLY STAGE VENTURES WERE ABLE TO GARNISH ONLY A SMALL AMOUNT OF VC FUNDING.
ALTHOUGH, IT’S NOT A TOO DIFFERENT PICTURE ON THE NATIONAL LEVEL THE MESSAGE BEING…….FIND EARLY STAGE FUNDING ELSEWHERE!
TO SUMMARIZE… +++++++++++++++++++++++++++++++++++++++++++++++ OK, BREATHE AGAIN….
HAS ANYONE FOUND A WAY OUT OF THIS? WELL, I’LL CAUTIOUSLY SAY “YES”, BASED ON SOME LIMITED INFORMATION I HAVE ON WHAT WAS DONE AT THE UNIV. OF UTAH, STARTING AROUND 2004. FIRST, THEY HAD TO FIGURE OUT WHERE TO START?
THEY IDENTIFIED SOME IMPORTANT QUALIFIERS: 1) COMMUNITY-BASED ORGANIZATIONS WILL HAVE MORE INTEREST IN REGIONAL AND LOCAL ECONOMIC DEVELOPMENT 2) ENGAGE LOCAL VCs WHO UNDERSTAND THE RISKS/REWARDS OF UNIVERSITY-BASED VENTURES KNOW WHO CAN HELP---AND WHEN (AT WHAT STAGE) 4) GET POTENTIAL FOLLOW-ON SUPPORTERS INVOLVED AT THE START 5) KEEP EVERYONE INVOLVED 6) CREATE A TECH-TRANSFER ECOSYSTEM THAT IS CONDUCIVE TO STARTING COMPANIES
I BELIEVE, MOST IMPORTANTLY, THEY DEVELOPED A PROGRAM FOR EACH STAGE OF DEVELOPMENT OF A POTENTIAL START-UP, TO THE POINT WHERE AN ANGEL, SEED, VC, OR COMPANY WAS INTERESTED. THEY DEVELOPED 3 DIFFERENT GRANT PROGRAMS; THEY PUT BUSINESS DEVELOPMENT PEOPLE IN THE TECH-TRANSFER OFFICE, WHO COULD GET THE START-UP TO THE SEED STAGE; THEY INVOLVED THE RIGHT PEOPLE, AND……. BETWEEN ’04 – ’08, UU AVERAGED “ 20 ” COMPANIES/YEAR; SECOND ONLY TO ‘MIT’ (REMEMBER, NAT’L AVG = 2.8 COMPANIES/YR)
WHERE DOES INVESTMENT MONEY REALLY COME FROM? BILLIONS OF $$ FROM FRIENDS AND FAMILIES ROUND—BUT THIS IS ‘ SMALL MONEY’ AND IT HAS A TENDENCY TO MUCK-UP THE CAPITALIZATION TABLE SO…..THE CRITICAL LINKS BECOME THE ANGEL AND SEED PROVIDERS ==================================================
WHAT DO WE KNOWI ABOUT ANGLE AND SEED GROUPS? ======================================================
WHAT ARE THEIR ADVANTAGES?
WHAT IS THEIR LEVERAGE?
THE UTAH GROUP REALIZED THAT THEY WERE NOT IN CALIFORNIA OR BOSTON…… THEREFORE, THEY HAD TO DEVELOP STARTEGIES FOR THEIR 2 ND TIER LOCATIONS
BUT JUST WHEN YOU THINK YOU’VE GOT IT ALL FIGURED OUT…
AT UTAH, THEY LEARNED THAT THE ‘ SEED-VENTURE CONTINUUM’ WAS CRITICALLY IMPORTANT AND, FOR STARTERs, FORMED AN INVESTMENT COMMITTEE
IT WENT ON FROM THERE… THEY LEARNED SOME HARD LESSONS, BUT… THEY GOT IT WORKING.
UPSTATE NY HAS MANY FUNDING SOURCES AND OTHER RESOURCES AT ITS DISPOSAL THESE ARE JUST A FEW…
<ul><li>Bill Greener </li></ul><ul><li>Patent Attorney—Bond, Schoeneck & King, PLLC </li></ul><ul><li>Member—Seed Capital Fund of Central New York </li></ul><ul><li>Tech-Transfer Challenges and Opportunities </li></ul><ul><li>Current state of Funding in New York </li></ul><ul><li>III. Snapshot of the Univ. of Utah Model </li></ul>
Bridging the Technology Commercialization Gap R&D Institutions Mission Commercial Sector Basic Research Applied R&D Business Development Full-Scale Commercialization <ul><li>Early-Stage Capital </li></ul><ul><li>Market Insight </li></ul><ul><li>Human Capital </li></ul>
Opportunity & Challenge <ul><li>US research Universities are an economic engine </li></ul><ul><ul><ul><li>conduct >2/3 of all basic research </li></ul></ul></ul><ul><ul><ul><li>are primary source of technology </li></ul></ul></ul><ul><ul><ul><li>produce >400 start-ups per yr </li></ul></ul></ul><ul><li>Universities vary dramatically in their ability to convert research into results. </li></ul><ul><li>Majority of Tech Offices can’t hit break even </li></ul><ul><li>Pressure to produce results linked to Federal and State sponsored economic development </li></ul><ul><li>Companies and VC’s still find it difficult to engage Universities in innovation development </li></ul>
WHAT’S REALLY HAPPENING? <ul><li>2006--$32.5B in State Funds spent on building technology ecosystems from US Universities with broken infrastructure </li></ul><ul><ul><ul><li>$116 million in annual patent costs </li></ul></ul></ul><ul><ul><ul><li>70% of patents will go unlicensed </li></ul></ul></ul><ul><ul><ul><li>60% of TTO’s aren’t even at breakeven </li></ul></ul></ul><ul><ul><ul><li>Avg revenue of ~$460,000 per office </li></ul></ul></ul><ul><ul><ul><li>Avg of 2.8 start-ups per year </li></ul></ul></ul><ul><ul><ul><li>80% of venture funding targeted to 12 metro areas </li></ul></ul></ul>Source: University Inc. 2006
The Case for University Spin-Outs <ul><li>1. More likely to have large outcomes </li></ul><ul><li>Go public at 114x the rate of other startups </li></ul>2. Less likely to fail Rate of Going Public Failure Rate Source: National Council Of Entrepreneurial Tech Transfer .07%
CRITICAL QUESTIONS <ul><li>Can Universities drive economic development? </li></ul><ul><li>Can they effectively serve their communities? </li></ul><ul><li>Can you build a model that can be replicated? </li></ul><ul><li>Can you stimulate continued innovation? </li></ul><ul><li>Can you build business in the confines of a non-profit? </li></ul><ul><li>Can you generate a long term equity structure? </li></ul>
Most Challenging aspects for TCO’s <ul><li>Access to CEOs/executive management talent </li></ul><ul><li>Access to seed or venture funding </li></ul><ul><li>Access to entrepreneurs. </li></ul><ul><li>Access to start-up resources </li></ul><ul><li>Ability to create university start-ups – in their environment </li></ul>
Traditional Funding Continuum VALUATIONS INCREASE BUSINESS RISKS DECREASE MENTORING NEEDS DECREASE $5M-20M $500K-5M $50K-500K >$20M Sweat SEED/START-UP FUNDING DEVELOPMENT FUNDING EXPANSION FUNDING OPPORTUNITY DEVELOPMENT CONTINUED GROWTH ANGELS, FOUNDERS & SEED FUNDS VENTURE CAPITAL – GROWTH EQUITY PE - PUBLIC MARKETS
Strong need for a new model Opportunity For Alignment Stage Pre-Seed Seed/Start-Up Funding Gap between $100,000 and $2,000,000 Early Later Source Founders, Friends and Family Individual Angels Venture Funds Investment $25,000 to $100,000 $50,000 to $150,000 $2,000,000/$5,000,000 and up
TAKE HOME POINTS <ul><li>NYS is not the “hub” of venture activity that some might think </li></ul><ul><li>NY City VCs have not invested ‘much’ in their own state </li></ul><ul><li>The ‘problem’ for seed-stage start-ups is growing </li></ul><ul><li>Questions for thought: </li></ul><ul><li>*Are the companies in NYS not worth investing in? </li></ul><ul><li>*Are seed stage investments in NYS so low that we cannot feed the pipeline for later stage investments? </li></ul><ul><li>*Do we have a ‘brain-drain’ problem? </li></ul>
Where do Tech Transfer Offices Start? <ul><li>Know what you do best-do “IT” </li></ul><ul><li>Involve Everyone </li></ul><ul><li>Restructure Organization </li></ul><ul><li>Add Value in Every Transaction </li></ul><ul><li>Support all Phases of Start-Up Development </li></ul><ul><li>Streamline Processes </li></ul><ul><li>Identify High Value Collaborative Research </li></ul>
The Initial Want List <ul><li>Build a community based fund </li></ul><ul><li>Engage the local VC’s </li></ul><ul><li>Venture vs Angel </li></ul><ul><li>Have the follow-in funders at the table </li></ul><ul><li>Clog the pipeline </li></ul><ul><li>Closed vs Open </li></ul>
New Company Formation Source of Equity Funds – Typical Year
Angel Organizations: <ul><li>Investment Statistics: </li></ul><ul><ul><li>70% of angel groups leave investment decisions up to the individual members </li></ul></ul><ul><ul><li>23% of the angel groups invest by majority group decision </li></ul></ul><ul><ul><ul><li>Of those that invest by majority decision, 90% are structured as LLCs, supporting previous discussions that the LLC legal structure appears to be the preferred group investment vehicle </li></ul></ul></ul><ul><ul><li> 7% of angel groups invest through investment committee decision </li></ul></ul><ul><ul><li>No responding angel group required unanimous decision for investment </li></ul></ul><ul><li>Source: Center for Venture Research, University of New Hampshire 2005 Angel Organization Survey </li></ul>
Reasons For An Angel Organization <ul><li>Quality deal flow </li></ul><ul><li>Greater investment clout from combined dollars </li></ul><ul><li>Collective due diligence </li></ul><ul><li>Education: formal and informal </li></ul><ul><li>Group social benefits </li></ul>
<ul><li>Strategic Choices </li></ul><ul><li>Due diligence: venture capital-style due diligence pays off </li></ul><ul><li>Experience: engaging individual with direct industry experience </li></ul><ul><li>Participation: High participation is interacting with the company 1 or 2 times per month, Low is 1-2 times per year </li></ul>1 HIgh due diligence was defined as > 20 hours spent Source: Kauffman Study: Returns to Angel Investors in Groups , 2007 Average Return Impact High 1 due diligence: 5.9X Low due diligence: 1.1X High experience vs. low experience nearly 2X improvement: High participation: 3.7X Low participation: 1.3X
<ul><li>Strategies for secondary cities: </li></ul><ul><li>Strengthen Clusters and Networks – Use local groups and virtual organizations to bring together investors, entrepreneurs, researchers and other parties to establish formal and informal relationships. </li></ul><ul><li>Encourage a Continuum of Capital – Support local angel capital investors who can nurture early-stage companies </li></ul><ul><li>Investment Creativity – Seek out alternative models of investment </li></ul><ul><li>Enhance Accessibility – Create policies and programs to support entrepreneurship </li></ul>Source: www.icic.org - 2007 The 10 highest-performing secondary cities in the U.S. (ranked by number of private equity deals per city) are (1) Boulder, Colo., (2) Salt Lake City, (3) Westborough, Mass., (4) Ann Arbor, Mich., (5) Norwalk, Conn., (6) Providence, R.I., (7) Southborough, Mass., (8) Stamford, Conn., (9) Melbourne, Fla., and (10) New Haven, Conn.
Post- Bubble Seed Capital Source: Venture Source, NASVF
Why a Venture - Seed model is critical <ul><li>A great investment committee can: </li></ul><ul><ul><li>See around the corner </li></ul></ul><ul><ul><li>Has the follow-on funding available </li></ul></ul><ul><ul><li>Works full time – fund manager </li></ul></ul><ul><ul><li>Help sober up an entrepreneur – art to saying “no” </li></ul></ul><ul><ul><li>Provide necessary Board and mentor roles </li></ul></ul><ul><ul><li>Provide some unrestricted capital </li></ul></ul><ul><ul><li>Encourage entrepreneurship </li></ul></ul>
Lessons Learned <ul><li>Can’t please everyone </li></ul><ul><ul><ul><li>No good deed goes left unpunished </li></ul></ul></ul><ul><li>Pick a lead </li></ul><ul><li>Business diversity – the market knows </li></ul><ul><li>Don’t focus on the Univ. needs-community needs also important </li></ul><ul><li>Full time commitment </li></ul><ul><li>Consider the economics—it must work! </li></ul>
SCF/CNY invests in and helps guide early stage companies in Upstate New York. Our goal is to create wealth for investors and assist with the region’s transition to a successful, high-tech, high-growth economy. www.scfcny.com EXCELL PARTNERS RAN UVANY BFLO ANGELS CVF BINGHAMTON OTT KAUFMANN FOUNDATION SIMON SCHOOL …..